Hostname: page-component-cd4964975-pf4mj Total loading time: 0 Render date: 2023-03-29T08:00:55.962Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

Rearmament to the Rescue? New Estimates of the Impact of “Keynesian” Policies in 1930s' Britain

Published online by Cambridge University Press:  15 November 2013

Nicholas Crafts
Professor of Economic History, Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom. E-mail:
Terence C. Mills
Professor of Applied Statistics and Econometrics, School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, United Kingdom. E-mail:


We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and “defense news.” We find that the government expenditure multiplier was in the range 0.3 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was less than is generally supposed. We find that rearmament gave a smaller boost to real GDP than previously claimed. Rearmament may, however, have had a larger impact than a temporary public works program of similar magnitude if private investment anticipated the need to add capacity to cope with future defense spending.

Copyright © The Economic History Association 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


We are grateful to Mark Harrison, Tim Hatton, Michael McMahon, Roger Middleton, George Peden, Valerie Ramey, Ken Wallis, participants in seminars at the University of Copenhagen, University of Southern Denmark, and University of Warwick, two anonymous referees, and the editor, Jean-Laurent Rosenthal, for helpful comments. Alexandra Paun provided excellent research assistance. The usual disclaimer applies.



Auerbach, Alan J., and Gorodnichenko, Yuriy. “Fiscal Multipliers in Recession and Expansion.” NBER Working Paper No. 17447, Cambridge, MA, September 2011.Google Scholar
Barna, Tibor.Redistribution of Incomes through Public Finance in 1937. Oxford: Clarendon Press, 1945.Google Scholar
Barro, Robert J., and Redlick, Charles J.. “Macroeconomic Effects from Government Purchases and Taxes.” Quarterly Journal of Economics 126, no. 1 (2011): 51102.CrossRefGoogle Scholar
Blanchard, Olivier, and Perotti, Roberto. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output.” Quarterly Journal of Economics 117, no. 4 (2002): 1329–68.CrossRefGoogle Scholar
Boyer, George R., and Hatton, Timothy J.. “New Estimates of British Unemployment, 1870–1913.” The Journal of Economic History 62, no. 3 (2002): 643–75.CrossRefGoogle Scholar
British Parliamentary Papers. Memorandum by the Chancellor of the Exchequer on the Future Exchequer Balance Sheet. Cmd. 376, 1919.Google Scholar
British Parliamentary Papers. General Annual Report on the British Army for the Year Ending 30th September, 1920. Cmd. 1610, 1922.Google Scholar
British Parliamentary Papers. General Annual Report on the British Army for the Year Ending 30th September, 1921. Cmd. 1941, 1923.Google Scholar
British Parliamentary Papers. Statement Relating to Defence. Cmd. 4827, 1935.Google Scholar
British Parliamentary Papers. Statement Relating to Defence. Cmd. 5374, 1937.Google Scholar
Broadberry, Stephen N.The British Economy Between the Wars: A Macroeconomic Survey. Oxford: Basil Blackwell Ltd., 1986.Google Scholar
Broadberry, Stephen N.Perspectives on Consumption in Interwar Britain.” Applied Economics 20, no. 11 (1988): 1465–79.CrossRefGoogle Scholar
Capie, Forrest H., and Collins, Michael. The Interwar British Economy: A Statistical Abstract. Manchester: Manchester University Press, 1983.Google Scholar
Capie, Forrest, and Webber, Alan. A Monetary History of the United Kingdom, 1870–1982, Vol. 1. London: George Allen and Unwin, 1985.Google Scholar
Chadha, Jagjit S., and Dimsdale, Nicholas H.. “A Long View of Real Rates.” Oxford Review of Economic Policy 15, no. 2 (1999): 1745.CrossRefGoogle Scholar
Chambers, David.Going Public in Interwar Britain.” Financial History Review 17, no. 1 (2010): 5171.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichelbaum, Martin, and Rebelo, Sergio. “When is the Government Spending Multiplier Large?Journal of Political Economy 119, no. 1 (2011): 78121.CrossRefGoogle Scholar
Crafts, Nicholas.U.K. Defence News, 1920–1938: Estimates Based on Contemporary Sources.” University of Warwick CAGE Working Paper No. 104, October 2012.Google Scholar
Dimsdale, Nicholas H., and Horsewood, Nicholas. “Fiscal Policy and Employment in Interwar Britain: Some Evidence from a New Model.” Oxford Economic Papers 47, no. 3 (1995): 369–96.CrossRefGoogle Scholar
Feinstein, Charles H.Domestic Capital Formation in the United Kingdom, 1920–1938. Cambridge: Cambridge University Press, 1965.Google Scholar
Feinstein, Charles H.National Income, Expenditure, and Output of the United Kingdom, 1855–1965. Cambridge: Cambridge University Press, 1972.Google Scholar
Ferris, John R.Men, Money, and Diplomacy: The Evolution of British Strategic Policy, 1919–26. Ithaca, NY: Cornell University Press, 1989.CrossRefGoogle Scholar
Hatton, Timothy J.The Outlines of a Keynesian Solution.” In The Road to Full Employment, edited by Glynn, Sean and Booth, Alan, 8294. London: Allen & Unwin, 1987.Google Scholar
Hebous, Shafik.The Effects of Discretionary Fiscal Policy on Macroeconomic Aggregates: A Reappraisal.” Journal of Economic Surveys 25, no. 4 (2011): 674707.CrossRefGoogle Scholar
Hornby, William.Factories and Plant. London: HMSO, 1958.Google Scholar
Howson, Susan.Domestic Monetary Management in Britain, 1919–1938. Cambridge: Cambridge University Press, 1975.Google Scholar
Howson, Susan.Sterling's Managed Float: The Operations of the Exchange Equalisation Account, 1932–1939. Princeton, NJ: Princeton University Press, 1980.Google Scholar
Ilzetski, Ethan, Mendoza, Enrique G., and Vegh, Carlos A.. “How Big (Small?) Are Fiscal Multipliers?” NBER Working Paper No. 16479, Cambridge, MA, October 2010.Google Scholar
Kahn, Richard F.The Relation of Home Investment to Unemployment.” Economic Journal 41, no. 2 (1931): 1173–98.CrossRefGoogle Scholar
Keynes, J. Maynard.The Means to Prosperity. London: Macmillan, 1933.Google Scholar
Keynes, J. Maynard, and Henderson, Hubert D.. Can Lloyd George Do It? The Pledge Re-Examined. London: The Nation and Athenaeum, 1929.Google Scholar
Liberal Party. We Can Conquer Unemployment. London: Cassell, 1929.Google Scholar
Mallet, Bernard, and Oswald George, C.. British Budgets, 1913–14 to 1920–21. London: Macmillan, 1929.Google Scholar
Mallet, Bernard, and Oswald George, C.. British Budgets, 1921–22 to 1932–33. London: Macmillan, 1933.Google Scholar
Mertens, Karel, and Ravn, Merton O.. “Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks.” American Economic Journal: Economic Policy 4, no. 2 (2012): 145–81.Google Scholar
Middleton, Roger.Towards the Managed Economy. London: Methuen, 1985.Google Scholar
Middleton, Roger.Government versus the Market. Cheltenham: Edward Elgar, 1996.Google Scholar
Middleton, Roger.British Monetary and Fiscal Policy in the 1930s.” Oxford Review of Economic Policy 26, no. 3 (2010): 414–41.CrossRefGoogle Scholar
Middleton, Roger.Macroeconomic Policy in Britain Between the Wars.” Economic History Review 64, V1 (2011): 131.CrossRefGoogle Scholar
Mills, Terence C.Are Fluctuations in U.K. Output Permanent or Transitory.” Manchester School 59, no. 1 (1991): 111.CrossRefGoogle Scholar
Mitchell, James, Solomou, Solomos, and Weale, Martin. “Monthly GDP Estimates for Inter-War Britain.” Explorations in Economic History 49, no. 4 (2012): 543–56.CrossRefGoogle Scholar
Peden, George C.British Rearmament and the Treasury: 1932–1939. Edinburgh: Scottish Academic Press, 1979.Google Scholar
Perotti, Roberto.Fiscal Policy in Good Times and Bad.” Quarterly Journal of Economics 111, no. 4 (1999): 13991446.CrossRefGoogle Scholar
Ramey, Valerie A.Defense News Shocks, 1939–2008: An Analysis Based on News Sources.” 2009. Scholar
Ramey, Valerie A.Can Government Purchases Stimulate the Economy?Journal of Economic Literature 49, no. 3 (2011a): 673–85.CrossRefGoogle Scholar
Ramey, Valerie A.Identifying Government Spending Shocks: It's All in the Timing.” Quarterly Journal of Economics 126, no. 1 (2011b): 150.CrossRefGoogle Scholar
Ramey, Valerie A.Government Spending and Private Activity.” NBER Working Paper No. 17787, Cambridge, MA, January 2012.Google Scholar
Robertson, A. J.British Rearmament and Industrial Growth, 1935–1939.” Research in Economic History 8 (1983): 279–98.Google Scholar
Rohn, Oliver.New Evidence on the Private Saving Offset and Ricardian Equivalence.” OECD Economics Department Working Paper No. 762, 2010.Google Scholar
Sabine, Basil E. V.British Budgets in Peace and War, 1932–1945. London: George Allen and Unwin, 1970.Google Scholar
Thomas, Mark.Rearmament and Economic Recovery in the Late 1930s.” Economic History Review 36, no. 4 (1983): 552–79.CrossRefGoogle Scholar
Thomas, T. J.Aggregate Demand in the United Kingdom, 1918–1945.” In The Economic History of Britain Since 1700, Vol. 2, edited by Floud, Roderick and McCloskey, Donald, 332–46. Cambridge: Cambridge University Press, 1994.Google Scholar